Not surprisingly, being a business owner comes with a multitude of responsibilities. Business owners may find it difficult to have their business resonate with customers and ultimately decide to shut it down. If closing their business also involves filing for bankruptcy, owners may be surprised that their personal credit may be affected.
Liability of Business Debt
Whether or not closing a business without paying all of its debts or filing for bankruptcy will affect a business owner’s personal credit will be impacted and how much responsibility they personally have for the business’s debt depends on a number of factors such as:
- The business’s type of entity;
- The tax liability of the company;
- Whose credit is actually on the lien, and, what may be the most evident factor,
- If the business owner signed a personal guarantee for any business debt.
Another way a business owner can determine their liability is by reviewing what business structure was used to create the business.
Whose Credit is Involved? The Mistaken Assumption Our Clients Make
Many of our clients use credit cards to make business purchases. Sometimes the credit cards are only used for business purchases and have the company’s name on the front of the card and the monthly statements. In our experience, even in these circumstances, it is extremely rare that the business owner does not have personal responsibility for the debt. This is due to the fact that the credit was obtained by the individual under their social security number. We see this often and can help with this circumstance.
A sole proprietorship is an individual who is in business but operating under a fictitious name. An example would be John Smith who has a sign out front, business cards, and invoices with the name John’s Wheel and Tire. Here “John’s Wheel and Tire” is basically a nickname for John Smith. In the eyes of the law, the business owner and their business are one and the same and the business owner is personally responsible for any and all business debts. This type of proprietorship would directly affect a business owner’s credit.
In a general partnership, each general partner is responsible for all business debts. If bankruptcy was filed on behalf of a business in this structure, the partner could be sued and held responsible and see the debts reflected on their personal credit score.
Limited Partnership, Limited Liability Company, or Corporation
In this structure, a partner will not be held as responsible should the business file for bankruptcy. Because of this, a business owner will most likely not see their personal credit affected. However, there are exceptions such as:
● Signing a Personal Guarantee. If you own one of these types of entities and have signed a personal guarantee, you have agreed to be responsible for any payments should the business go into debt. If the business files for bankruptcy, you could see your personal credit affected.
● Business Taxes. If business taxes are unpaid then a business owner could see personal credit impacted because these types of taxes are usually not discharged if a business files for bankruptcy.
Concerned About Business Bankruptcy?
Business owners have every right to be concerned about their personal credit should a business be near bankruptcy and the experienced team at Weintraub & Selth, APC is ready to assist you should you be facing this circumstance. There are alternatives to bankruptcy and our attorneys can determine what may be right for your situation.
Reach out for a free consultation through our online form or by calling (310) 220-4147.